The G20 met earlier this month and affirmed its commitment to global harmonisation of crypto regulation ahead of the release on 21st June 2019 by the Financial Action Task Force (FATF) of its recommendations on enhancing the AML/ATF obligations in the virtual asset space. The FATF issued an Interpretive Note to Recommendation 15 on New Technologies that describes how countries and relevant companies will need to comply with the recommendations to prevent the misuse of virtual assets for money laundering and terrorist financing and the financing of proliferation.
FATF Recommendation 15 requires virtual asset service providers to be regulated for anti-money laundering and anti-terrorist financing and be subject to effective systems for monitoring and supervision. Whilst certain jurisdictions, such as Bermuda, have already introduced a regulatory framework for digital assets, many jurisdictions do not yet have AML/ATF frameworks which address the crypto industry. As the FATF will monitor jurisdictional implementation of the new requirements and will conduct a review in June 2020, we can expect a rapid pace of change as jurisdictions look to introduce (or enhance) their regulatory frameworks.
We can also expect greater focus from regulators on the on-going monitoring of AML/ATF risk across all regulated sectors. Businesses will need to implement effective on-going transactional monitoring systems which will allow them to identify and analyse more efficiently any unusual behaviour patterns and to file suspicious activity reports where appropriate.
With the US recently threatening to impose new sanctions on Iran, it is imperative that businesses have effective methods to screen for changes to sanctions in “real time”.
Multi-jurisdictional sanctions regimes and evolving political landscapes add a new level of complexity around sanctions compliance. A significant development is the focus on “secondary sanctions” on jurisdictions such as Russia, Iran, North Korea and most recently Venezuela. These seek to put pressure on non-US third parties to stop their activities with the sanctioned country or entity, even where there has been no violation of U.S. sanctions laws. Failure to do so results in a threat of being cut off from the US financial system.
With the continued uncertainty around Brexit, the UK may also be required to introduce a new independent sanctions regime upon exiting the EU. The volume and pace of change to the sanctions landscape makes this a complex area with significant consequences for failure to comply. Companies must review and test their sanctions screening system to ensure effectiveness as well as efficiency and speed of response to the changing sanctions regimes.
Transparency of beneficial ownership information has been a political issue since 2013 and the 2015 Fourth European Money Laundering Directive stopped short of requiring public central registers of beneficial ownership information. However, the Fifth European Money Laundering Directive (5AMLD) requires the implementation of public central registers and for those registers to be linked at an EU level through a central European platform.
In 2018, the UK Parliament passed the Financial Services Bill requiring the government of any British Overseas Territory to implement public registers by the end of 2020; this has been rescheduled for 2023. In June 2019 the British Crown Dependencies acknowledged the movement towards implementing public registers of ownership across the EU and have made a political commitment consistent with the EU’s approach to transparency of beneficial ownership information of companies under 5AMDL within a deliverable timeframe. Currently it is expected that the British Crown Dependencies and Overseas Territories will, by 2023, have public central registers aligned to the approach taken in 5AMDL. However, the timeframe may differ depending on the result of the EU’s implementation review, the speed at which public central registers of beneficial ownership become an internationally recognised standard and if the Overseas Territories choose to challenge the power of the UK Parliament to legislate for them.
It is currently unclear if non-European countries will introduce public registers. The Common Reporting Standard, also introduced by the EU, was internationally adopted (save for the US) so it stands to reason that public registers might also become an international standard by 2023 (presumably save for the US). If so, there would be no sign of transparency stopping. 5AMLD does not dramatically change what industry practitioners will have to do from an “obliged person” perspective, but it does change the environment within which clients’ structures will operate. That latter change is where discussions with clients will need to take place to understand clients’ appetite for transparency of their personal data. By 2025, we would expect public registers to be the norm across all reputable international finance centres.
Economic substance came into force on 1 January 2019 and is probably the single most challenging legislation the British Crown Dependencies and Overseas Territories have had to comply with since the introduction of anti-money laundering legalisation in the 1990s. Service providers should be reviewing all structures to ensure they comply with substance regulations and discuss any restructuring issues with clients as soon as possible.
There are nine “in-scope” relevant activities of which “holding entities” and “financing and leasing” are probably the most relevant for the industry. In particular, holding entities (i.e. companies without active business or economic activity) are perceived by the EU as presenting a specific risk of being used for money laundering and tax evasion. If the holding entity is kept in a structure, then the substance test is three-fold and broadly aligned to the requirements of other relevant activities: (1) compliance with its obligations as a company; (2) it has adequate people; and (3) adequate premises in the jurisdiction. The position is different in Jersey where holding entities must comply with the same substance requirements as for other relevant activities. Should a company be engaged in “financing and leasing”, then it needs to demonstrate it is directed and managed, has a physical presence and has core-income generating activities in its jurisdiction.
Reporting to relevant authorities is due in 2020 and, whilst it is expected that there will be a period of transition by the relevant authorities, it is also expected that the relevant authorities would need to demonstrate their supervisory jurisdiction over service providers to the EU Code of Conduct Group. Sanctions for non-compliance are progressive and include financial penalties and spontaneous disclosure of information to foreign tax officials in the jurisdiction where the immediate parent company, ultimate parent company and/or ultimate beneficial owner is/are resident. The ultimate sanction, for repeated non-compliance with the substance requirements, is for the relevant sector company to be struck off the register.
The move towards global standards and the emergence of new regulatory risks will mean that compliance will increasingly become an essential component of any effective business.
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